Energy bill costs explained: Bosses warn of 40% in fuel poverty


Energy bosses have called for more Government support for households facing a ‘truly horrific’ winter, with as many as four in 10 people potentially falling into fuel poverty before the end of the year.   

Energy bills for the 22million British households not on fixed-term deals rose 54 per cent to just under £2,000 a year on average in April, the last time the Ofgem price cap was reviewed. 

Analysts have warned of a further jump in the price cap from October, which could see the typical household paying £600 more per year. 

As this leads to calls for more help for households with soaring payments, we reveal below what goes into making up the total cost of this bills, alongside the gas and electricity itself.

Bills rising: Energy bosses are calling for more support for vulnerable households

Chief executives at some of the UK’s biggest energy firms told MPs that people on lower incomes were going to ‘really struggle’ in the autumn as the household energy cap is expected to rise again. 

Bosses from E.ON, EDF, Scottish Power, and Centrica (which owns British Gas) were quizzed by MPs on their efforts to support customers with rising energy bills, after complaints that suppliers were forcing people onto more expensive variable tariffs. 

Four energy suppliers appeared before the House of Commons Business, Energy and Industrial Strategy Committee to field questions on their handling of the energy price crisis.  

Michael Lewis, chief executive of E.ON, said up to 40 per cent of households could be in fuel poverty from October, if Ofgem increases the cap once again. 

He told MPs his firm was ‘expecting a severe impact on customers’ ability to pay,’ adding that he expected debts of customers to rise by 50 per cent, or £800m.  

Around 10 per cent of UK households are reportedly suffering from fuel poverty at the moment. 

Fuel poverty is when households have above-average energy costs, and paying those costs would push them below the poverty line. 

‘We get 8,000 calls a week from struggling customers’

Keith Anderson, chief executive of Scottish Power, said it received 8,000 calls last week from customers worried about paying their energy bills. 

He said that many poorer and more vulnerable households would face ‘horrific’ bills if the price cap was raised in October, especially those on prepayment meters.   

‘During the summer their consumption will go down, so their bills will be more manageable,’ he said. ‘Come October, that is going to get truly horrific.

‘I am hugely – massively – concerned for people. There are so many people who are really going to struggle with this issue.’ 

Chief executives from E.ON, EDF, Scottish Power, and Centrica (British Gas) were quizzed by the House of Commons on their efforts to support customers in line with rising energy debts

Chief executives from E.ON, EDF, Scottish Power, and Centrica (British Gas) were quizzed by the House of Commons on their efforts to support customers in line with rising energy debts 

Anderson called for a ‘deficit fund’ where the Government could offer ‘vulnerable’ households or those in fuel poverty a payment of £1,000 towards their bills, to repaid over 10 years.

Chris O’Shea, chief executive of Centrica, said the situation would get ‘much worse’ without intervention, while EDF’s chief executive, Simone Rossi, said its vulnerable customers could be spending £1 in every £6 of their income on their energy bills. 

Meanwhile, Hayden Wood, chief executive of Bulb Energy which entered special  administration in November 2021, told MPs he was still being paid the same £250,000 salary he was receiving before the firm collapsed, after he was asked to stay on to ‘support customers’. 

Bulb, the largest supplier to face collapse, was ultimately rescued in the biggest state bailout since the Royal Bank of Scotland. The move is expected to cost taxpayers more than £2billion.

With more households facing increased energy costs as fixed deals expire, This is Money explains how energy bills are calculated, and whether any reduction is on the horizon.  

Why are energy bills rising? 

Graph shows wholesale prices of gas have risen from 2021. They continued to soar after Russia, the world's largest natural gas exporter, invaded Ukraine in March 2022

Graph shows wholesale prices of gas have risen from 2021. They continued to soar after Russia, the world’s largest natural gas exporter, invaded Ukraine in March 2022

There was massive pressure on suppliers in 2021 as wholesale prices increased substantially, resulting in the UK’s energy price cap rising by just under 50 per cent in April.   

Wholesale prices continue to soar after Russia, which is the world’s largest natural gas exporter, invaded Ukraine in March.

The UK gets little of its gas from Russia directly, but prices could still be driven up worldwide if Russian supplies to Europe were affected. 

Some have since estimated the price cap could rise by a similar amount again on 1 October, as there is little sign of the current crisis abating. 

Energy providers have also been forced to shoulder the costs after 29 energy providers when bust in 2021, with the larger provider, Bulb Energy, leaving 1.7 million customers in the dark and without an energy provider.

As millions of customers were absorbed by the remaining energy providers such as British Gas or EDF, the additional costs associated with the bailouts has been pushed onto existing customers’ bills.  

How are my energy bills calculated? 

Energy bills are made up of a number of costs ranging from operating to wholesale costs, from profits to the gas and electricity actually used by a household. 

Wholesale costs 

The wholesale market price of gas and electricity accounts for the biggest portion of the average energy bill at around 50 per cent.  

Wholesale prices have been steadily rising in since last August, and now make up approximately £1,077 of the average capped annual bill, according to regulator Ofgem.

Energy suppliers tend to buy gas and electricity in advance, so Ofgem determines the cost of buying energy from the market by tracking wholesale prices over a period of six months. 

So unless wholesale prices fall substantially over the summer, Ofgem’s price cap will likely be increased again in October. 

Ofgem's current price cap was estimated to increase to almost £2,000 from April and is set to be reviewed again in August, as experts predict the October price cap could increase again

Ofgem’s current price cap was estimated to increase to almost £2,000 from April and is set to be reviewed again in August, as experts predict the October price cap could increase again

Network costs 

The next largest chunk of the typical customer’s bill, around 18 per cent, goes towards providing and running energy infrastructure, such as pylons and gas pipelines. 

Network charges also include the costs associated with switching customers away from failed suppliers, and on to ones that are still operational. 

Energy companies can claim ‘any reasonable additional, otherwise unrecoverable, costs’ when taking on customers from collapsed rivals – currently adding around £68 per year to an average energy bill. 

The next price cap will be set by Ofgem in August and come into force in October

The next price cap will be set by Ofgem in August and come into force in October

Policy costs 

Policy costs currently account for around 8 per cent of the average household bill.

This covers energy company obligation schemes, which pay to upgrade home insulation for households on low incomes; as well as renewables obligations, which require suppliers to get some of their electricity from renewable sources.

Policy costs also cover the Warm Homes Discount scheme, which will pay vulnerable households £150 next winter, and the feed-in-tariff payments that owners of homes with solar panels get when they sell energy back to the National Grid. 

Ofgem figures show that policy costs have fallen from 12 per cent to 8 per cent of bills.

Everything else  

Energy companies are also able to claim operating costs equating to around £220 of the annual average price-capped energy bill, up 10 per cent from last October. 

The winter price cap previously allowed energy suppliers to claim £23 from each default energy tariff as profit, but under the new cap they will make more than £37 on an average energy bill.

The Government also takes 5 per cent of the typical energy bill in VAT, equating to £98 a year for the average household – up from £61 before April – or more than £2.1bn in total.

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